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New Paid Leave Guidance Clarifies Medicare Tax

Posted on Apr. 2, 2020

A new set of questions and answers about the payroll tax credits now available for paid leave has clarified how to factor in healthcare costs.

The tax credits can be increased by both the qualified health plan expenses allocable to the leave wages as well as the employer’s share of Medicare tax, according to the FAQ posted by the IRS March 31.

Veena K. Murthy of Crowe LLP told Tax Notes that there seemed to be confusion among practitioners about the Medicare tax issue and that the clarification in the guidance was welcome.

The Families First Coronavirus Response Act (P.L. 116-127), signed into law March 18, provides payroll tax credits for employers providing paid sick and family and medical leave. Murthy said the FAQ appears generally consistent with how she anticipated the credits would work.

The FAQ outlines how employers who anticipate receiving the credits can fund paid leave wages by retaining employment taxes they would otherwise be required to deposit with the IRS. This means employers can retain “federal income tax withheld from employees, the employees’ share of social security and Medicare taxes, and the Eligible Employer’s share of social security and Medicare taxes with respect to all employees,” according to the guidance.

The FAQ also provides several answers on how to determine the allocable amount of qualified health plan expenses, an issue some practitioners had said was unclear.

“Qualified health plan expenses are properly allocated to the qualified sick or family leave wages if the allocation is made on a pro rata basis among covered employees (for example, the average premium for all employees covered by a policy) and pro rata on the basis of periods of coverage (relative to the time periods of leave to which such wages relate),” according to the FAQ.

It also says that health plan expenses generally include those paid by the employer and those paid by the employee with pretax salary reduction contributions, but not amounts the employee paid for with after-tax contributions.

Quarterly Refunds

The IRS guidance notes that “for any calendar quarter the amount of the credits the Eligible Employer is entitled to exceeds the employer portion of the social security tax on all wages . . . paid to all employees, then the excess is treated as an overpayment and refunded to the Eligible Employer under sections 6402(a) or 6413(a) of the Internal Revenue Code.”

Murthy said it wasn’t entirely clear if the excess credits an employer was entitled to would be carried over each quarter, thus delaying the refund. But the FAQ makes it clear that the refund applies each quarter, which she said is very generous.

Employers can apply for an advance of the credits using Form 7200, “Advance Payment of Employer Credits Due to COVID-19.” A draft version of the form and instructions was issued March 30.

“The IRS expects to begin processing these requests during April 2020,” the FAQ states.

Unanswered Questions

Michael K. Mahoney of Ogletree, Deakins, Nash, Smoak & Stewart PC said that while the FAQ is welcome, several questions remain and require additional guidance from the IRS. For example, he said it’s unclear how employers claim or report the credits on Form 941, “Employer's Quarterly Federal Tax Return.” Specifically, he said it remains to be seen if the Form 941 will be updated or if a separate schedule will be created to enable employers to report the required information.

Mahoney said it’s also unclear how payroll agents or certified professional employer organizations will reconcile the credits on a client-by-client basis.

“These questions are vexing for employers with automated payroll systems, as they are concerned about being able to modify their systems in time for as-of-yet unknown reporting requirements,” Mahoney said.

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